How Maryland’s Tax Rates Are Driving Jobs to Virginia

Maryland accounted for the largest taxpayer exodus of any state in the region between 2007 and 2010.

An advertisement now running in Maryland’s second-largest newspaper asks, “relocating to Virginia?” The ad is from a residential real estate firm and reaches employees of engineering giant Bechtel, who are looking for new homes in Virginia.

Bechtel announced last year it is moving 600 jobs from Frederick, Maryland to Reston,Virginia. Governor Martin O’Malley’s economic development department hastily arranged $9.5 million in government aid to keep some remaining jobs in Maryland. A state that competes with its neighbors should not have to pay companies to stay. But Maryland does not compete with Virginia—and so it pays—with last-minute corporate bribes, lost jobs, and a reduced tax base.

Maryland accounted for the largest taxpayer exodus of any state in the region between 2007 and 2010, with a net migration resulting in 31,000 residents having left the state. Where did most of them go? Virginia. Virginia is now home to nearly 11,500 former Marylanders—a shift of $390 million from the tax rolls of one state to another, according to the non-partisan Tax Foundation.

That’s the position Maryland finds itself in after six years of damaging tax increases. Since 2007, taxes and fees have been raised 24 times, taking an additional $2.4 billion out of the economy each year. That explains why two states with similar economies, demographics, and a shared dependence on federal government employment and procurement sharply diverge in job growth. Maryland’s unemployment rate is a full point higher than Virginia’s and just last month the state led the nation in job loss, according to the Labor Department’s April numbers.

It’s hard to say if O’Malley understands what is going on though. When Northrop Grumman opted to relocate its corporate headquarters in northern Virginia over Maryland in 2010, the governor said “it was a win for the Washington region,” as if the Redskins won the Superbowl. It was not a win for Maryland job seekers who would have liked to work for the defense contractor.

Other such “regional wins” include Maryland losing out to Virginia in every major corporate relocation in recent years. Add Computer Sciences Corporation, Hilton Worldwide, SAIC, and Volkswagen North America to the growing list of companies that chose the Old Dominion over the Free State.

It’s not just the large corporations taking their jobs to Virginia. The individual income tax increases of 2007—and another income tax hike signed into law this month—have taken their toll on the 81,000 Maryland businesses organized as S Corporations, who see these increases on their personal returns.

Judith Palfrey, a web developer in Montgomery County in the Washington suburbs, says Maryland has “shut the door on small businesses.” Organized as an S-Corporation, Palfrey is ready to leave immediately and would have already if not for her husband’s job. “I speak to small businesses everyday who are just holding on,” she continues, while noting her own business is off 35 percent from 2008.

Whether a corporate CEO or a sole proprietor—where would you prefer to set up shop? Maryland’s sales tax is 6 percent; Virginia’s is 5 percent. The top personal income tax rate is 9 percent in Maryland compared to 5.75 percent in Virginia. The corporate income tax is 8.25 percent compared to 6 percent.

When CNBC’s annual “America’s Top States for Business,” report ranked Virginia No. 1, Governor Bob McDonnell said, “We are telling the Virginia story to job-creators from Beijing to Boston.” What is Maryland’s story? At the moment, it’s moving vans and real estate agents ready to help Marylanders relocate to more tax-friendly states, one of which is right next door.